STT and Income Tax

Securities Transaction Tax (STT) is the tax payable on the value of taxable securities transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004.

What all is covered by Securities?
Securities definition is as per section 2(h) of the Securities Contracts (Regulation) Act, 1956, but for our purpose, let’s just simply say Securities mean Equity Shares and Equity Derivatives (i.e. Futures and Options). Full definition of Securities is given in Appendix, for information.

What are taxable transactions?
Purchase and Sale of securities through a recognised stock exchange in India. STT is not applicable on off-market transactions.

What rate is STT payable?
STT is applicable at different rates depending upon the security (whether equity or derivative) and the transaction (whether purchase or sell). Current STT rates are given below. Note that Service Tax, Surcharge and Education Cess are not applicable on STT.

Option Transactions
Purchase: NIL at the time of purchase of option. However the purchaser has to pay 0.125% of the Settlement Price i.e. (Number of Lots * Lot Size * Strike Price), in case of option exerciseSell: 0.017% of Premium

Now that you have understood how STT is calculated, click here to understand more about charges other than brokerage and STT levied on stock exchange transactions.

Income Tax and STT
Taxation of profit or loss from securities transactions depends on whether the activity of purchasing and selling of shares / derivatives is classified as investment activity or business activity. Treatment of STT also depends upon whether the income from these securities transactions are included under the head “Income from Capital Gains” or under the head ‘Profits and Gains of Business or Profession’.

Scenario 1: ‘Income from Capital Gains’

This refers to the scenario where the assessee is either Salaried or is engaged in some other business or profession and trading in securities is not the main line of business. In such cases gains or losses from securities transactions are taxed under the head “Income from Capital Gains”. Gains or losses are subject to Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) tax depending upon the period of holding, i.e., if the holding period is less than 1 year, gains are classified as STCG and if the holding period is equal to or greater than 1 year, gains are classified as LTCG. Any equity share, which has been sold through a recognised stock exchange and on which STT has been paid, is entitled to exemption from LTCG under Section 10 (38) of the Act. Similarly, in case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act.

Important points to note:

STCG and LTCG rates of 15% and NIL are available only if the specified security is sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange in India, will not be covered

The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange

The exemption is not available to transactions where STT has not been paid

Since LTCG is exempt, Long Term Capital Loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse

As per section 40(a)(ib) of the Income tax Act, STT cannot be claimed as an expense in computing the income chargeable under Capital Gains

Scenario 2: ‘Profits and Gains of Business or Profession’

This refers to the scenario where main business of the assessee is trading in securities. In such cases the gains or losses are classified as business income, which is taxed at the regular rate of income-tax. STT paid in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under section 36 of the Income-tax Act. Until 31st March 2008, the amount of STT paid was allowed as rebate under section 88E of the Income-tax Act. However, with effect from 1st April 2008, rebate available under section 88E has been discontinued.